Struggling demand amidst soaring prices in the luxury sector

The departure of Chanel’s creative director has profoundly shaken the luxury industry, underscoring its current predicament between exorbitant prices and decelerating demand. Major fashion houses such as Chanel, Louis Vuitton, and Dior (LVMH) rely heavily on the prestige of their creative directors to market new designs and substantially increase their retail prices.

Since 2019, leading luxury brands have raised their product prices by an average of 33%. This accounted for half of the sector’s organic sales growth over the past two years, according to RBC analysts.

However, as the global cost of living has soared, consumers have become more discerning, challenging these pricing strategies.

Chanel, which now sells its iconic quilted bag for over 10,000 euros, acknowledges that the market environment is increasingly challenging, necessitating stronger justification for high prices.

“I think the entire sector has pushed prices too far,” said Erwan Rambourg, an analyst at HSBC.

“Even die-hard Chanel fans are criticizing the multi-year price hikes of the brand’s bags,” concurred Monika Arora, founder of the fashion website PurseBop.com.

Lack of new ideas?

Investors in Chanel’s publicly traded rivals are also questioning whether the steep price hikes indicate a lack of new ideas.

According to Carole Madjo, head of European luxury goods research at Barclays, “Investors worry that price increases have excluded or alienated consumers and that brands have limited short-term growth levers.”

Industry leaders have only recently begun to acknowledge that the cost-of-living crisis has significantly reduced customers’ purchasing power.

The “aspirational luxury client,” who is less affluent, “must adapt to this new normal, and it won’t happen overnight,” remarked LVMH’s CFO, Jean-Jacques Guiony, in April.

LVMH CEO Bernard Arnault told analysts in January, “When you raise prices, there has to be a reason behind it. The product must justify it.”

In a rare move, Chanel’s rival Saint Laurent, owned by Kering, has lowered the prices of the small Loulou bag and the Cassandre Classic chain wallet, according to Barclays analysts, who suggest previous price hikes may have been overly aggressive.

Gucci, another Kering house, is increasing the number of high-priced items in its collections while simultaneously offering basics, such as branded socks for $200, to attract less affluent buyers.

Luxury brands must cater to younger consumers as well as ultra-wealthy, resilient clients, noted Erwan Rambourg at HSBC. “When you sell more than 10 billion euros of products annually, it’s not optional.”